Fidelity, Thy Name Is Ned

Sunday

Jul 29, 2007 at 5:35 AM

Edward C. Johnson III, the 77-year-old chief executive of the FMR Corporation, shows no signs of wanting to alter his managerial style, which endorses constant change.

SUMNER Redstone made headlines nine days ago when he made it clear that his only daughter, Shari, would not necessarily succeed him as head of Viacom and CBS, the media conglomerates he controls. But in a little-noticed move, another corporate patriarch also recently distanced himself from his daughter and possible successor.

Just a few days earlier, on July 17, Edward C. Johnson III, the 77-year-old chief executive of the FMR Corporation, which runs Fidelity Investments, the mutual fund business, appointed an outsider as president of FMR — pushing his eldest child, 45-year-old Abigail, one step farther from the throne.

The move comes at a challenging time for Fidelity, which faces increasing competition for mutual fund investors from American Funds and Vanguard. But as the all-powerful head of a private company, Mr. Johnson can do whatever he likes. He shows no signs of wanting to step down or alter a style in which he pits his executives, including his daughter, against each other, according to industry veterans, most of whom requested anonymity because of their longtime relationships with Fidelity.

“He definitely likes to keep people off balance; it is all about competition,” said James Lowell, editor of Fidelity Investor, an independent newsletter. “Ned has done everything in his power to ensure that his daughter has to compete as aggressively as any other senior member of the firm — not to just get her current job and role, but to maintain it.”

In a recent interview, Mr. Johnson said he was not committed to having a family member replace him as chief executive. “I would expect the family would continue to play a critical role in leading Fidelity,” he said. “However, the company does not necessarily have to be run day-to-day by a family member. It will be run by the person who is determined to have the right skills and chemistry.”

An advocate of the Japanese workplace philosophy of “kaizen,” which endorses constant change as a way to improve efficiency, Mr. Johnson frequently and unexpectedly moves his managers around. A few years ago, his daughter, known as Abby, seemed to suffer a setback when he moved her out of the highly visible mutual fund division. This April, Mr. Johnson gave additional responsibilities to a rising star, Ellyn McColgan, the 53-year-old president of the Fidelity Brokerage Company, setting her up as a possible contender for the chief executive position.

Then last week, Mr. Johnson tapped Rodger Lawson, 60, a onetime Fidelity executive, to become president of FMR. Mr. Johnson said both his daughter and Ms. McColgan would report to Mr. Lawson.

Mr. Lawson, who was most recently a vice chairman of Prudential Financial, has strong credentials for his new job: he oversaw the marketing of Fidelity’s funds in the late 1980s, when Fidelity was the gold standard in mutual fund companies. But his age could make him an unlikely candidate to succeed Mr. Johnson, according to several veteran Fidelity watchers; they see Mr. Lawson as another trusted aide brought in to help a turnaround at the mutual fund business.

Still, the new layer of authority between Mr. Johnson and his daughter seems to underscore his determination to keep the reins tightly in his own hands. Despite his age, Mr. Johnson has never described his plans for succession at Fidelity, the company his father founded in 1946. Mr. Johnson said, “I have no immediate plans to retire, so I have not named my successor.” But he added, “Fidelity does have a succession plan in place to ensure a smooth transition.”

It is impossible to know exactly how the succession issue affects the performance of the sprawling, family-dominated company, which directly manages $1.3 trillion in stock, bond and money-market mutual funds, plus 401(k) plans, and discount and institutional brokerage accounts. But there is no question that Mr. Johnson’s penchant for rewriting the corporate lineup has yet to solve some of the problems at the mutual fund division. Last year, the company said that its revenue rose to a record $12.9 billion, while net income fell $150 million, to $1.2 billion, as it hired more analysts to improve the performance of the division.

In public, at least, Ms. Johnson appears unfazed by the uncertainty over her future role. “People are always speculating,” she said in a rare interview. “I don’t go out of my way to ignore it, but I don’t get worked up about it.” One thing she doesn’t have to worry about is money: the Johnson family is worth about $20.5 billion, according to Forbes.

FOR now, Ms. Johnson must content herself with a seat on FMR’s board and her position as president of the Fidelity Employer Services Company, which provides work force retirement plans like 401(k)’s. The six-person board also includes Mr. Johnson’s only son, Edward Johnson IV, who works in the real estate unit. His daughter Elizabeth’s husband, Robert C. Ketterson, is head of Fidelity Ventures, the company’s venture capital arm.

Until two years ago, Abigail Johnson seemed the obvious candidate to become both chief executive and chairwoman. After she ran several mutual funds for the company, Mr. Johnson appointed her head of all the funds in 2001. At the time, she was also the single largest shareholder in the family with 24.5 percent of the voting stock, according to company documents. Mr. Johnson held about 12 percent of the stock at the time, with other family members owning 12.5 percent. Employees held the balance of Fidelity’s stock, about 51 percent. (The stock ownership structure among family members has changed more recently, but Fidelity no longer discloses exact percentages.)

But the performance of Fidelity’s mutual funds during her tenure was lackluster. In 2005, Mr. Johnson removed her from the high-profile post and instituted a number of changes. Robert E. Stansky, manager of the troubled Magellan fund, stepped down, and Mr. Johnson split off Pyramis Global Advisors, Fidelity’s institutional investment arm, from the mutual fund unit.

That unit continues to face aggressive competition. According to the Financial Research Corporation, five years ago, Fidelity’s stock and bond funds accounted for 12.5 percent, or $523 billion, of the $4.2 trillion under management in all such funds, handily beating the Vanguard Group with 11.7 percent and American Funds with 8.5 percent.

Today, Fidelity trails both of its rivals. At the end of May, it managed $921 billion in stock and bond funds, or 11.2 percent of the $8.2 trillion in such funds, making it the third-largest company in stock and bond fund assets after American Funds with 13.4 percent and Vanguard with 12.9 percent. (Fidelity is quick to point out some improvements, noting that for the 12 months ending May 31, its funds beat 61 percent of their peers.) Fidelity is, of course, far more than its prominent mutual fund unit. Its distribution business, which includes brokerage operations and the 401(k) unit, is growing handsomely.

But “getting the performance right on the mutual funds is critical,” said Aaron H. Dorr, a director at Putnam Lovell NBF, an investment bank. Because brokerage houses offer competitors’ funds as well as their own, “you have to offer best of breed, and if that is someone else’s fund, customers are going to buy it,” he said.

THOUGH the problems are not easily solved, a number of people who follow Fidelity, including a former Fidelity executive, say Mr. Johnson was unhappy with how his daughter managed the mutual fund business and her reluctance to make changes he sought.

Skeptics got some ammunition for their view when Fidelity filings in 2005 showed that Ms. Johnson sold some of her shares to family trusts that were voted by her father. Although Fidelity said the sale was done for the benefit of future generations, it raised eyebrows. Ms. Johnson said the sale was done for estate planning purposes.

“Even though there may have been good estate planning reasons to make the transfer of stock from Abigail to the family trust it seems obvious that it was done to give Mr. Johnson voting control over the transferred stock,” said William D. Zabel, a trusts and estates expert at the law firm Schulte Roth & Zabel.

Since then Fidelity has not disclosed how much of the Johnsons’ stake each family member controls.

In response to a recent query, the company said, “It should not be presumed that any individual Johnson holds any percentage previously stated by Fidelity.”

A number of Fidelity watchers are convinced that Ms. Johnson may one day become chairman of the board, but they doubt her father will turn over the chief executive role to her. “She never distinguished herself as a money manager,” said Eric Kobren, executive editor of Fidelity Insight, an independent newsletter.

In a recent interview at the headquarters of the company’s 401(k) unit in Marlborough, Mass., Ms. Johnson acknowledged that her tenure running the funds had been challenging, but she said that she was “very proud of the work I did there” even though “it did not do as well as we would like.”

Turning around the mutual fund unit is still a high priority for Mr. Johnson. In 2005, he replaced his daughter with Robert L. Reynolds. But last April, shortly after giving an interview to Barron’s in which he said the task of revamping the mutual fund unit was “halfway done,” Mr. Reynolds left Fidelity. Now, Mr. Johnson has taken more direct control of the unit.

But if Mr. Johnson is disappointed in his daughter, she gives no sign that anything is amiss in her relationship with her father, to whom she said she speaks several times a week. Despite her immense wealth and the demands of raising two young daughters, Abby Johnson has no plans to bow out. “The stay-at-home thing is definitely not for me,” she said.

MS. Johnson worked at Fidelity during the summer of her senior year in high school.

“I think I thought it was as much fun as anything else,” she said. “I was on the phones.”

At Hobart and William Smith Colleges in Geneva, N.Y., she majored in art history and “eked out” a minor in economics. “I was not really thinking I was going to college to learn how to do something that would be directly applicable in my career,” Ms. Johnson said. “You go to a liberal arts school to learn how to think and write and learn about the world, which is, long term, pretty helpful.”

But she became interested enough in business to go to Harvard Business School. After getting her M.B.A. in 1988, she joined Fidelity. She maintains a low profile at the firm, and while she owns a beachfront home on Nantucket, she steers clear of the celebrity scene there.

Ms. McColgan, on the other hand, is much more outgoing, people who work with Fidelity said.

“Ellyn has been the visible face of Fidelity as far as the women’s business community is concerned and the entire business community,” said Toni Wolfman, a former partner at the law firm Foley Hoag. “We never see Abby.”

Fidelity’s brokerage arm, which Ms. McColgan runs, added $45 billion, or three quarters of all the new money that came into Fidelity last year. “Anyone who believes that Ellyn McColgan is not going to be one of two leaders or the sole leader at Fidelity simply does not know the lay of the land,” said Mr. Lowell of Fidelity Investor.

But despite Ms. McColgan’s increasing role, no one discounts the mercurial temperament of her boss.

“You don’t know what side of the bed Ned is going to get up on,” Mr. Lowell said. “And so the fair-haired girl tonight might not be the fair-haired girl next month.”

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